Florida Banking September 2022

Several states — Alaska, Kentucky, South Dakota, Tennessee, and now Florida — permit a married couple to elect to treat the property they own as community property by placing it in a community property trust. How and why Florida now provides that option is discussed below. The FCPTA Rewards The FCPTA took effect on July 1, 2021, and in summary, allows a married couple in Florida to treat as community property, the assets the couple places into a community property trust. The driving force behind the FCPTA was a potential tax benefit. Under the Federal Income Tax Code (the “Code”), community property gets a “100 percent” or “double” income tax basis step-up at the death of the first spouse. While a deceased spouse’s estate in a community property state will only include one-half of a couple’s community property for federal estate tax purposes, the basis of all community property generally is adjusted to fair market value at the time of the first spouse’s death. In a non-community property state, the result differs. Only the deceased spouse’s half of the property the couple owns will receive a step-up in basis. As a result, the surviving spouse in a community property state likely will receive a larger tax benefit than the surviving spouse in a non community property state when he or she ultimately sells the property. The example below demonstrates the difference. Husband and Wife in a non-community property state own a non-homestead piece of real property as tenants by the entireties. They bought the property for $200,000 and it is now worth $700,000. When the husband dies his half of the property, $350,000, is included in his estate and passes to Wife, who receives a step-up in basis. Her adjusted basis is now

$450,000, which consists of her original one-half basis of $100,000 plus her Husband’s adjusted basis of $350,000. If Wife sells the property for $700,000, and no other deductions apply, she would pay capital gains tax on $250,000 ($700,000 minus $450,000), not $500,000. In a community property state, pursuant to the Code, Wife in this same situation would receive a “100 percent” or “double” step-up in basis, and likely would pay minimal to no capital gains tax if she sold the property for $700,000. The FCPTA permits married couples to opt in to this tax treatment if they follow the requirements of the Act, and it broadens and clarifies the rights of former community property state residents who previously were guided only by the Florida Uniform Disposition of Community Property Rights at Death Act. The provisions of that Act are beyond the scope of this article. Establishing a community property trust pursuant to the FCPTA is very similar to establishing other revocable or irrevocable trusts in Florida with a few notable exceptions. The trust must: • Include an express declaration. The trust instrument must declare the trust to be a community property trust. § 736.1503(1), Fla. Stat. • Appoint a qualified trustee. At least one trustee must be a natural person residing in Florida, or a company authorized to act as trustee in Florida. §§736.1502(6), 736.1503(2), Fla. Stat. Corporate trustees should be preparing to administer community property trusts as a result of this requirement. • Be properly executed. Both spouses must execute the trust with the requisite formalities identified in the FCPTA. § 736.1503(3), Fla. Stat. Trust Banking, Continued on page 22


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